Is India the future for investment banks?

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India is fast becoming a remote front and middle office for the banking industry.

JPMorgan’s plan to double its workforce in India and employ a further 4,500 staff there by 2007 to support its global structured finance and derivatives business is yet another sign that more highly skilled jobs on Wall Street could eventually be shipped to the subcontinent and performed for a fraction of the US cost.

This has already happened in other product areas. The days when the only services that banks outsourced or offshored to India was basic number-crunching and data entry are long gone. Investment banks have for years been outsourcing skilled middle-office and front-office jobs to India, or indeed recruiting highly skilled graduates with MBAs or MAs in finance there themselves.

Take equity research. JPMorgan was the first bank to move some of its equity research offshore to India when it hired more than 30 analysts in Mumbai in 2003, a move that has since been emulated by many of its competitors. The equity research work done by Indian employees might have started with basic data collection and valuation assessments but now much of a bank’s company- or sector-specific maintenance research can be produced there. With the cost of in-house research becoming increasingly burdensome to investment banks, the volume of research produced by their Indian teams, or outsourced to third-party companies in India, has increased dramatically.

JPMorgan’s new recruits will settle credit derivatives trades and other structured finance transactions. In order to process the settlement, employees in India will have to understand the term sheets of complex transactions, which will require some legal, accounting and specialist product knowledge. Market experts say that once staff have that specialist knowledge, the next step could be to get Indian recruits to evaluate trading ideas for derivatives desks, rather than just settling trades.

It doesn’t stop there. Banks are shipping increasingly highly-skilled work to India to support a variety of different global businesses. For example, Goldman Sachs spent $30 million establishing a new centre in Bangalore in mid-2004. Now it employs 750 people working in asset management, treasury and equity research and plans to double its headcount there. It says that many members of its Bangalore workforce have middle- or front-office roles.

It is clear that with many banks conducting large-scale recruitment drives in India, there will be pressure on the cost of recruitment and the availability of highly qualified graduate talent. But it’s also true that the sort of work done by and for investment banks in India is evolving fast and getting more sophisticated all the time. As banks continue to commit time and capital to training their Indian workforces, the potential for even more of their global operations to be based there cannot be overstated.